Wednesday, December 21, 2011

Hong Kong property prices

The current state of the Hong Kong property market has generated a considerable amount of press coverage and public commentary during the course of 2011, mostly focused on two issues:

1. making Hong Kong housing more affordable for low and middle income groups;

2. the extent to which Hong Kong property prices either have fallen or will fall.

As to the affordability issue, as much as the politicians bleat about increasing affordability, the blunt reality is that they have taken steps which make housing less affordable. Specifically, they put through a large increase in rates earlier this year (at about the same time that our grossly overpaid civil servants where handed a substantial pay increase) and they have contributed to mortgage finance being harder to obtain and more expensive. The effect of the special stamp duty is debatable in so far as prices are concerned but has obviously reduced liquidity in the secondary market.

As to current market prices, it is clear from looking at sales data and mortgagee valuations that prices today are lower than they were at the peak of the market (in early 2011). Using HSBC's on line property valuation tool, the properties in our portfolio are now worth between 9% and 2% less than their peak valuations. While you can obviously debate whether mortgage valuations accurately reflect the current market, it seems clear to me, both from the mortgage valuations as well as discussions with agents, that prices have fallen, but not by much.

As to the future, while sentiment is decidedly is bearish, given continued low interest rates, high employment, continued inflation, a degree of restraint by the government in supplying additional land for residential development and continuing demand from PRC buyers, it would be surprising if we saw a repeat of the 1997-2003 bear market. At the same time, I still do not see value at current price levels. Beyond that, I have no idea as to whether prices will continue to decline and, if so, by how much. Accordingly, as an investor, I have no interest in buying additional properties at this time.